Overview
This lecture covers mergers and takeovers as methods of inorganic business growth, including their types, benefits, and drawbacks.
Definitions and Differences
- A merger occurs when two or more firms join forces to form a new business.
- A takeover happens when one business purchases and absorbs another, transferring all its assets and brands.
- In a takeover, no new business is formed; the acquired company is integrated into the acquirer.
Types of Integration
- Backward Vertical Integration: Merging with or taking over a supplier to control raw materials and cut costs.
- Forward Vertical Integration: Merging with or taking over a customer (like a retailer) to gain control over product marketing and sales.
- Horizontal Integration: Merging with or taking over a competitor at the same stage of the supply chain to achieve greater economies of scale.
- Diversification: Merging with or taking over a business from a different industry to expand into new markets.
Advantages of Mergers and Takeovers
- Synergy: Two businesses combined can produce results greater than the sum of individual parts.
- Economies of Scale: Larger scale can lead to lower costs, especially in horizontal integrations.
- Growth in profits through combining revenues and reducing duplicate resources and costs.
Limitations and Risks
- Regulatory approval may be required, and mergers or takeovers can be blocked if they reduce competition.
- Job insecurity, staff upheaval, and cultural clashes may lower motivation and productivity.
- High costs involved, often needing external finance and incurring interest.
- Risk of diseconomies of scale if the combined organization becomes too large to manage efficiently.
Key Terms & Definitions
- Merger — Formation of a new business by joining two or more firms.
- Takeover — Purchase of one business by another, absorbing its assets.
- Vertical Integration — Merging with firms at different stages of the supply chain (backward or forward).
- Horizontal Integration — Merging with competitors at the same stage.
- Diversification — Expanding into a different industry via merger or takeover.
- Synergy — The enhanced effect achieved by combining organizations.
- Economies of Scale — Cost savings from increased production scale.
- Diseconomies of Scale — Rising costs due to inefficiencies in large organizations.
Action Items / Next Steps
- Review the differences and examples of each type of integration.
- Prepare notes on synergy and economies of scale for exam essays.
- Understand potential risks and regulatory considerations for mergers and takeovers.